Tuesday, August 27, 2019

Altria Group Joins The Dividend Kings List

Altria Group, Inc. (MO), through its subsidiaries, manufactures and sells cigarettes, smokeless products, and wine in the United States. It offers cigarettes primarily under the Marlboro brand; cigars principally under the Black & Mild brand; and moist smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands. The company also produces and sells varietal and blended table wines, and sparkling wines.

Altria increased its quarterly dividend by 5% to 84 cents/share just last week. This marked the 50th year of consecutive annual dividend increases for this newly minted dividend king. I will update the dividend kings list at my next review.

Between 2008 and 2018, Altria managed to boost its earnings per share from $1.45 to $3.68. The company expects to generate between $4.15 and $4.27/share in adjusted earnings per share in 2019.

On a side note, the earnings per share for 2016 and 2017 have been adjusted to exclude one-time accounting items.

There are a lot of reasons to like Altria. The products are branded and addictive and the market for tobacco products so far is in the hands of a few major players with Altria holding a dominant position. There is some threat of future legislation banning the sale of tobacco products or making it uneconomical. However, local governments take in a ton of money by heavily taxing tobacco products. It is hard to find another scapegoat that can be taxed so heavily.

The other factor to consider is that while the number of smokers is expected to be decreasing over time, so far the increase in prices has more than offset the drop in consumers. At some point, this could reverse, but this has been the fear for several decades now. So far, price increases have more than offset volume declines, which results in growing net income year over time. Future growth in earnings will also be driven by productivity improvements, as well as strategic acquisitions and new product developments. Share buybacks are another tool that could increase earnings per share over time. As an owner of a 10% stake in Anheuser - Busch Inbev (BUD), Altria's fortunes are also tied to the performance of this entity.

New regulations could potentially be bad for e-cigarettes, which compete with Altria’s products. However, there may be regulation against certain types of menthol cigarettes, which is one reason why tobacco stocks seems to have sold off as of recently. I am not sure if I would embrace marijuana’s legalization, or Altria’s deal with Aphria to acquire a stake in the cannabis company. The cannabis market is still young, and may disrupt the market for tobacco products. The winners from legalization may not be known for years down the road.

I am also not a big fan of the company’s investment in JUUL. You can check the reasons here. While this deal shifts the risk profile, and increases debt, it could theoretically also increase earnings per share too. It is very likely that the future dividend growth may be less stellar than in the past.
I was thinking that this would be my last investment in Altria for this year. However, the stock is a very good value today. That being said, I am taking an increasingly concentrated bet, because I have the highest portion of my dividend income coming from Altria. If I am wrong, and the tobacco business is being disrupted at a faster pace than anticipated, my portfolio could take a hit in dividend income. If the stock goes further down, I would be unable to add further to the position from a risk management perspective.

Growth in earnings per share is impressive, given the fact that the company has paid out 80% of earnings to shareholders annually. In addition, the company also managed to repurchase 10% of shares outstanding during that same time period.

Over the past decade, Altria has managed to more than double its dividend. The company paid out $1.22/share in 2008, and it paid out $3/share in 2018. Altria raised its dividend just last week by 5% to 84 cents/share. Altria’s intention is to return a large amount of cash to shareholders in the form of dividends.

The company’s dividend payout ratio has declined from 85% in 2008 to a little over 82% in 2017. Management has stated its target for Altria’s dividend payout ratio of approximately 80% of its adjusted diluted earnings per share. That hasn’t stopped it from more than doubling earnings per share over the past decade.

Currently, the stock is attractively valued at 11.10 times forward earnings and yields 7.20%.

Relevant Articles:

Altria Rewards Shareholders With a Smoking Hot Dividend Increase
Analysis of Altria's Recent Deal Activity
Dividend Kings List For 2019
British American Tobacco (BTI) Dividend Stock Analysis

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